Bloomberg News

Japanese Auto Parts Makers Bracing for EU Cartel Fines

By Ma Jie, Masatsugu Horie and Aoife White
January 31, 2013

A Denso Corp. employee assembles parts for a cruise control system at the company's Daian plant in Inabe city, Mie prefecture, Japan. Denso and Yazaki pleaded guilty in the U.S. to “multiple price-fixing and bid-rigging conspiracies” in selling parts to auto manufacturers. Photographer:Haruyoshi Yamaguchi/Bloomberg

Toyota Motor Corp. (7203) suppliers
embroiled in the largest cartel probe on record have rebounded
from a slump that followed almost $1 billion in fines in Japan
and the U.S. Now they face the prospect of even more penalties
in Europe.

EU fines will probably be announced this year, said Takeshi
Shinagawa, a director at the Japan Fair Trade Commission. Parts
makers Sumitomo Electric Industries Ltd. (5802), JTekt Corp. (6473) and at
least 12 others could get EU cartel fines higher than those
levied in Japan, he said.

Toyota affiliate Denso Corp. (6902) and Sumitomo Electric, also a
supplier to Honda Motor Co. and Nissan Motor Co., have been
investigated in cartel probes following raids of four
manufacturers by watchdogs in the U.S., the EU and Japan in
2010. Fines this year may be big enough to cause declines in the
component makers’ shares, said Syusaku Nishikawa, an analyst at
Daiwa Securities Co.

“Investors may not have fully factored in the risks of the
antitrust fines for the companies still under investigation,”
Nishikawa said. Given the prospect of fines, he said he can’t
recommend buying Sumitomo Electric, Fujikura Ltd. (5803), or many other
parts makers.

Antoine Colombani, a spokesman for the European Commission,
declined to comment on future fines for car parts makers. He
said regulators have visited producers of automotive lighting,
safety equipment, bearings and thermal systems and had no
deadline for completing the inquiries. These add to a formal
probe the EU opened in August into car wire harnesses that
didn’t identify companies under investigation.

Fine Risks

Japan’s parts makers have rebounded in Tokyo trading as the
yen’s depreciation increased the value of overseas income. The
yen has fallen 12 percent over the past three months, reaching
91.41 on Jan. 30, the weakest since June 2010.

Denso has surged 37 percent since Oct. 31, while Sumitomo
Electric rose 20 percent and bearing maker JTekt rallied 63
percent. The 29 Japanese members of the Bloomberg World Auto
Parts and Equipment Index gained a combined 28 percent in the
period, more than the 25 percent gain in the benchmark Nikkei
225 Stock Average and better than the 19 percent gain for all
102 parts index members.

The probes include companies based in Japan, Europe and the
United States, and the investigations have widened to Canada and
Australia. So far, Japanese companies have received the biggest
penalties.

Widening Probe

Denso, Yazaki and 12 other companies declined to comment on
cartel investigations that are underway. Fujikura, Yazaki Corp.,
Ichikoh Industries Ltd. (7244), Mitsuba Corp. and Stanley Electric Co. (6923)
say they are taking steps to prevent price-fixing. Koito
Manufacturing Co. (7276), Fujikura and Mitsubishi Electric Corp. said
they have not set aside money to cover fines that may be imposed
by EU regulators. Among at least 11 other Japanese companies
under investigation, none would comment on whether they had
allocated funds for possible EU fines.

Yazaki, the world’s largest maker of wire harnesses, which
control a car’s electrical system, paid $470 million last year,
a record for a Japanese component maker. Denso paid $78 million.
The two accounted for more than half the total 2012 antitrust
fines levied by the U.S. Justice Department, according to
Washington, D.C., law firm Patton Boggs LLP. Closely held Yazaki
also paid 9.6 billion yen ($106 million) in Japan.

Sharis Pozen, then the Justice Department division’s acting
chief, said the U.S. investigation was the agency’s largest
ever. Fines in Europe can be up to 10 percent of sales, though
authorities rarely impose the maximum.

Highest Fine

The highest EU fine was 896 million euros ($1.2 billion),
levied on windshield maker Cie. de Saint-Gobain SA in 2008 for
plotting with rivals to fix the price of car windows. The
penalty amounts to 2 percent of the company’s 2008 revenue of
43.8 billion euros.

Denso and Yazaki pleaded guilty in the U.S. to “multiple
price-fixing and bid-rigging conspiracies” in selling parts to
auto manufacturers, the Justice Department said last year. The
companies met regularly to allocate supply of parts and
coordinate price increases, regulators said.

The fines levied by competition authorities do not include
settlements for lawsuits by consumers and dealers seeking
compensation for purchases made at prices inflated because of
cartel activity.

Keiretsu Connection

For example, Tycko & Zavareei LLP filed papers in U.S.
District Court in Michigan last March on behalf of Cindy Prince,
a plaintiff seeking to represent buyers of affected vehicles.
The filing alleges that Yazaki, Sumitomo Electric, and five
other companies operated a conspiracy for at least 10 years,
“the purpose and effect of which was to rig bids for, and to
fix, raise, stabilize, and maintain prices of automotive wire
harnesses and related products.”

The global focus on Japanese automakers comes partly from
business traditions in the country, where industrial groups
called “keiretsu” have historically chosen cooperation over
direct competition, said Francis Rawlinson, a professor at
Kwansei Gakuin University in Nishinomiya City, Japan.

“Part of the reason Japanese suppliers had violations is
their special ties with automakers, which is part of a unique
culture here,” said Rawlinson.

Golf Outings

Toyota has a supplier group known as Kyohokai, which helps
executives of the 200-plus member companies get to know each
other through golf and dining. Rawlinson said such activities
are “very dangerous,” given the risk of price collusion.

“It’s very regrettable that some of our suppliers have
been involved in violations of antitrust laws and we recognize
the seriousness of the issue,” Toyota spokeswoman Shino Yamada
said by e-mail. “We will take concrete measures against
individual cases based on the details of the investigation.”

Kyohokai, established in 1943, holds executive roundtables,
makes proposals to Toyota on “timely themes,” and holds golf
competitions and social gatherings, according to its website.

While supplier groups like Kyohokai are professional
organizations for sharing information -- and not setting prices
-- “they may appear to some foreigners as a hotbed of
cartels,” said Toru Fujiwara, senior managing executive officer
at Tsubakimoto Chain Co. (6371), a Kyohokai member.

Dawn Raids

At least one company has decided Kyohokai activities aren’t
appropriate for its executives. Fujikura Ltd., a wire harness
maker based in Tokyo, says it stopped attending Kyohokai events
after the company strengthened compliance rules in 2009.

Japan’s competition watchdog entered the offices of Koito
last March as it gathered information for its probe of four
headlight makers in a price-fixing case.

Bearings makers JTekt, Nachi-Fujikoshi Corp. (6474), NTN Corp. (6472) and
NSK Ltd. (6471) also slumped after the cartel watchdog raided their
offices in July 2011, then tumbled again when probes were
announced by EU authorities that November. Since Oct. 31, Koito
has surged 54 percent, Stanley Electric is up 36 percent and
Ichikoh has jumped 36 percent.

Antitrust regulators around the world last year levied at
least $1.1 billion in fines on companies involved in car parts
cartel investigations, according to John Connor, a law professor
at Purdue University.

Based on the value of parts sales around the world, global
fines may reach $5 billion, Connor said by phone. Any damage
claims by purchasers may add to that, he said.

“The loss from the fines could be big enough to shake the
foundation of these companies,” said Takuro Maekawa, a lawyer
in Osaka whose clients include shareholders suing for damages in
auto parts price-fixing cases. “Japanese companies have been
extremely lax in terms of cartel prevention.”

To contact the reporters on this story:
Ma Jie in Tokyo at
jma124@bloomberg.net;
Masatsugu Horie in 大阪 at
mhorie3@bloomberg.net;
Aoife White in Brussels at
awhite62@bloomberg.net

To contact the editor responsible for this story:
Young-Sam Cho at
ycho2@bloomberg.net